The primary issue presented is whether it is fraud within the meaning of that statute for a political party leader to fail to disclose to state officials a potential conflict of interest in his handling of the state's patronage system.

The Court of Appeals held that a conviction under this so-called intangible rights theory is proper and we urge this court to reverse.

The basic facts were as follows: The petitioners and the third individual, Howard Hunt, were politically active in the Democratic Party, in the state of Kentucky, during the 1970s.

In part because of their hard work on behalf of Governor Carroll, who was elected in 1974, petitioner Gray was appointed to a cabinet position in 1976 and Mr. Hunt was named head of the Democratic Party.

Hunt as the head of the Democratic Party was invested with substantial patronage powers by the governor, which is not an uncommon practice, I think, in any state.

What may be somewhat less common is the decades long tradition in Kentucky that certain state insurance commissions are treated as part of the patronage system.

Thus, the agent for the state in procuring insurance was asked to share commissions with other individuals holding insurance licenses.

Unknown Speaker: Why is that worse than ordinary party patronage?

I don't understand.

Mr. Phillips: I don't know that it is worse than ordinary party patronage.

I think it's just somewhat less common than any other party patronage.

Unknown Speaker: All of it is fraud as far as you're concerned?

Mr. Phillips: As far as the government's concerned.

Unknown Speaker: Right.

Mr. Phillips: Yes, I think that's correct.

Unknown Speaker: Does it include box seats to the Derby?

[Laughter]

Mr. Phillips: I suspect the government would say so.

Yes, Your Honor.

Those receiving shared commissions were not required to perform any services or to be engaged in the insurance business at the time that they received those commissions.

All that was required was that a licensed agent be available.

And it was not uncommon frankly for relatives of public officials to receive some of those commissions.

For instance, the State Insurance Commission--

Unknown Speaker: Was there no violation of state law for these people to get commissions for having done no work?

Mr. Phillips: --No, absolutely not a violation of state law to receive commissions for doing no work.

There is no obligation that you do any work.

Unknown Speaker: How about if you're not a licensed agent?

Mr. Phillips: That would be a violation of the state law.

Unknown Speaker: And that was involved here as well, wasn't it?

Mr. Phillips: No, at the time that all the commissions were received, the individuals receiving them were licensed agents, or had a licensed agent affiliated with the company involved, or the recipient of the commission.

Unknown Speaker: So, it's your position that at no time was any Kentucky state law violated here by either of your clients?

Mr. Phillips: I would say two things about that, Justice O'Connor.

First, that's correct.

No state law was violated.

Two, even if state law had been violated there was no instruction to the jury asking the jury to find that state law had been violated.

So that it's not, you know, whether there was a violation of state law in this case is simply not relevant to what the jury decided.

As I was suggesting.

It was not uncommon for public officials, or the relatives of public officials themselves to receive shared commissions under the patronage scheme.

The Insurance Commissioner himself testified that his son was receiving insurance commissions as a part of this practice.

He knew about it and never doubted that it was a lawful practice.

In this case the government has however, challenged Mr. Hunt's recommendation to the Insurance Commissioner to appoint the Wombwell Insurance Agency as the agent of the state for Worker's Compensation and his directions as to how to share those commissions.

Because the government in its brief, in this Court on the merits, has for the first time suggested that this case is not really an intangible rights case, I think that it is terribly important that the court understand clearly, precisely how the case was submitted to the jury.

The government has reproduced the relevant instructions in its brief at pages nine to ten and footnote eight.

In reading them as a whole, I submit, reveals quite clearly that the District Court told the jury, at the government's request that it could conclude that petitioners "devised such a scheme", describing the scheme in the indictment as read in relevant portion to the jury, if the jury found five facts basically.

One, that there was control over the naming of an insurance agency by Mr. Hunt.

Two, that Mr. Hunt had something to do with the selection of Wombwell.

Three, that he directed Wombwell to share those commissions in a particular way, four, that he held an ownership interest in Seton Investments.

And five, that he failed to disclose debt interest to the state government.

With respect to the petitioners then, they are charged solely with aiding and abetting that basic claim.

Our position is that however you analyze those facts as required to be found by the jury, there is no fraud in this case.

And that the jury was clearly instructed that it could find on that theory as an alternative basis for holding that the Mail Fraud Statute has been violated and that the jury, and therefore the government must justify its extension of the Mail Fraud Statute to the situation involving Hunt.

Unknown Speaker: Well, Mr. Phillips, I thought the government is now telling us that the jury was instructed that for mail fraud, the government had to prove a scheme to defraud the citizens of their right to honest performance of public business and to obtain money or property by false pretenses.

And that the jury clearly had to find both present.

Mr. Phillips: Well, the first part, the government is clearly, I mean, the government is clearly making that argument and there is a statement in re-reading--

Unknown Speaker: And there is such an instruction?

Mr. Phillips: --Well, the indictment was read to the jury and that is in the indictment.

But if you read the paragraphs before the indictment and the paragraphs after the indictment, the reliance on obtaining money or property by false pretenses is irrelevant.

It is a scheme to defraud as described at the beginning.

Unknown Speaker: So you think, the position you take is that the instructions as a whole do not bear out that argument.

Mr. Phillips: Absolutely.

Absolutely.

Couldn't say it better myself.

Because the government in it's brief on the merits in this Court has taken, excuse me, to the place the government's theory then into perspective, the Court must realize, one, the jury was not asked to find that the state of Kentucky or any of its citizens lost any money as a consequence of this scheme.

And two, the jury was not asked to find that Hunt, Gray, or McNally frankly received one cent from the patronage arrangement.

The theory is merely one of non-disclosure.

Unknown Speaker: The theory being these commissions would have been paid to somebody anyway.

Mr. Phillips: That's absolutely correct.

Unknown Speaker: So--

Mr. Phillips: The commissions, the size of the commissions were outside of the state's control.

That money went to Wombwell.

So that the government's repeated reference to this as a matter of public funds, simply inaccurate.

They were not public funds.

They were Wombwell's funds and Wombwell willingly parted with them.

Unknown Speaker: --The theory is that so much commission was going to be paid to Wombwell, what by the company or by the Kentucky government?

Mr. Phillips: It is paid by the underwriter.

Unknown Speaker: By the under--

Mr. Phillips: It's a commission paid back by the underwriter.

But the amount of money that Kentucky had to pay to--

Unknown Speaker: --When you say xxx.

Mr. Phillips: --have insurance was set.

It couldn't be modified in any way.

Unknown Speaker: When you say it's a commission paid back by the underwriter, who is the underwriter in this case?

Mr. Phillips: Well, there were two underwriters and they're just large insurance companies.

Unknown Speaker: And they're--

Mr. Phillips: xxx.

Unknown Speaker: --It's basically a discount?

Mr. Phillips: No, it's just the method of recompense for the activities of the agent and so--

Unknown Speaker: So they're paying the agent for having gotten the business?

Mr. Phillips: --Right.

Unknown Speaker: The way other insurance commissioners would.

Mr. Phillips: Absolutely.

Unknown Speaker: And they were going to pay a specified amount to Wombwell and these people's theory is if Wombwell wanted to split it up with other people that was a private arrangement.

Mr. Phillips: That is precisely our position, Mr. Chief Justice.

As far as we're concerned the term--

Unknown Speaker: Although I suppose you can say if Wombwell's willing to split it with other people, Wombwell would also be willing to charge less.

Mr. Phillips: --Might of been willing to charge less.

Unknown Speaker: Which would mean that the state would probably be able to buy its insurance for less.

Mr. Phillips: Well, except that there's--

Unknown Speaker: xxx.

Mr. Phillips: --no evidence to that effect in the record in this case.

And no effort by the government to try to prove that--

Unknown Speaker: Well, but that's common sense isn't it?

I mean, what does Wombwell care.

Wombwell's not getting the money.

They would as soon give it back to the state as give it to some third party.

Mr. Phillips: --Well, I mean, my guess is that Wombwell would prefer to share it with other insurance agents if for no other reason than to develop good will.

Unknown Speaker: That the whole reason for the scheme?

It was a patronage device wasn't it?

Mr. Phillips: Yes, it was a patronage device.

It was to generate good will both with the state of Kentucky and with other insurance agencies.

Unknown Speaker: They weren't handing anything back to the state.

Mr. Phillips: No, no one ever suggested that anything could be granted back to the state.

Unknown Speaker: That wasn't patronage to hand it back to the state.

Mr. Phillips: No, that would be sort of anti-patronage, I suppose.

Unknown Speaker: Yeah.

[Laughter]

Mr. Phillips: In light of the jury instructions in this case, it seems to us quite remarkable that the government has all, I think, but conceded that the Mail Fraud Statute as applied to a political party leader is wholly inapplicable.

It's sole defense on this issue in the brief appears in a single paragraph on page 32.

And the government tells the court, quote, it is at least clear that those individuals, referring to party leaders given the power to carry on the state's business, have a duty not to use that governmental party to criminally profit themselves or their friends.

The problem with that statement and it's the sole defense of the government's case here, is that it again ignores the jury instructions.

There was no criminal profit.

There was no profit at all, in terms of what the jury was asked to find.

The sole theory in this case involves a matter of non-disclosure.

That's what the jury was instructed on and that's what the jury found.

The fact the jury found that however is unfortunate for the government because this is not mail fraud.

It's not fraud of any sort.

Because as this Court said in Schiarella, in order for there to be fraud, there must be a duty to disclose and what is utterly missing in anything, in either the government's brief or anything at the trial in this case is any indication of where a duty to disclose exists and extends to a political party leader.

And because of that, the government's case necessarily fails as a matter of law.

Mr. Gray was a political official, but as the jury--

Unknown Speaker: You mean a state official, you mean?

Mr. Phillips: --Yes, he was a state official.

But as the jury instruction quite clearly specifies--

Unknown Speaker: He was part of the scheme?

Mr. Phillips: --He was found guilty under the government's theory of aiding and abetting Hunt.

But, not as a government official.

There's nothing in the instruction with respect to aiding and abetting that required Mr. Gray to be a government official.

And in the closing arguments--

Unknown Speaker: Did he have any duty to disclose?

Mr. Phillips: --I don't believe he would of had a duty to disclose, although the jury wasn't required to find that he would.

Unknown Speaker: But, he was a state official.

Mr. Phillips: He was a state official.

Unknown Speaker: He certainly is in a different position than Hunt.

Mr. Phillips: He would be in a different position and this case would be somewhat different if the jury had been instructed only that it had to find the Mr. Gray had violated his duties.

But that was not the way the jury was instructed.

The jury was instructed--

Unknown Speaker: Did Mr. Gray get any money?

Mr. Phillips: --I'm sorry?

Unknown Speaker: Did Mr. Gray get any money?

Mr. Phillips: No, Mr. Gray did not receive any money.

Unknown Speaker: He didn't get any benefit?

Mr. Phillips: The government attempted to prove that he may of gained some benefit, but the jury was not asked to make any findings as to whether he had gained any benefit.

And there is clearly no evidence as to receipt of any money.

Whether he gained a benefit is unclear but--

Unknown Speaker: You answered while ago that this scheme didn't involve any violation of state law.

I take it means that Mr. Gray didn't violate state law either?

Mr. Phillips: --I don't believe that Mr. Gray violated any state law as a consequence of his conduct.

Unknown Speaker: Even if he did in fact receive benefits in the form of condominium usage and vehicle usage and so forth and so on in Florida and elsewhere?

Mr. Phillips: Well, I'm not frankly completely familiar with bribery laws in the state of Kentucky, but my sense is that those benefits are so far removed from any public actions that Mr. Gray would have undertaken that I doubt seriously there would have been a violation of state law.

Unknown Speaker: Well, he was the insurance commissioner, wasn't he?

Mr. Phillips: No, no.

He wasn't the insurance commissioner.

Unknown Speaker: xxx.

Mr. Phillips: He was the Secretary of the Cabinet.

Unknown Speaker: Yeah, that's right.

And why did Mr. Hunt want him in the scheme?

Mr. Phillips: Well, I hesitate to speak on it, for Mr. Hunt, but I think the answer is they were friends and I don't think it is a scheme, frankly.

They were friends and they happened to have an inter-relationship.

But I don't know that from our perspective and given that the jury wasn't required to make any findings, I hesitate to say that he was involved in that particular scheme.

But I think the important point to remember, Justice White, is that the jury was instructed on that point in the alternative and therefore, whether or not, and I don't think the Gray theory would hold water either, but whether or not it would is irrelevant to this case.

The government still has to demonstrate that Mr. Hunt violated the law in the ways that he did and that the petitioners aided and abetted that violation.

Unknown Speaker: Who again was Mr. Hunt?

Mr. Phillips: Mr. Hunt was the head of the Democratic Party.

He was the Executive Chairman of the Democratic Party of the state of Kentucky.

Never held public office within the state of Kentucky.

Unknown Speaker: But, he was empowered by the governor to direct the receipt of these insurance commissions?

Mr. Phillips: He was placed in charge of basic patronage recommendations.

Unknown Speaker: He was given some kind of defacto duty to perform on behalf of the state.

Mr. Phillips: Well, the jury instruction didn't ask for that.

All the jury was asked to find was that he had control over those decisions and so, and the evidence was that he made recommendations and those recommendations were followed.

To say that he had defacto control in that sense strikes me as not any different than any other party leader making recommendations to his own party leaders who happened to hold public offices.

So, in a sense sure, he had defacto control, but our position is that jury instruction is so far removed from anything that would make him a public official, that there is simply no basis for creating a duty, certainly if the government has cited nothing--

Unknown Speaker: Mr.--

Mr. Phillips: --on the basis for creating that duty.

And that is a federally created duty.

It does not exist in state law.

And,--

Unknown Speaker: --Mr. Phillips, may I just be sure I understand something?

Is it your position on this the fact there are no pecuniary benefit and nothing but a violation of an alleged duty to disclose, which you deny existed?

Would you say the case would be different if he were a state official?

If Mr. Hunt were a state official?

Mr. Phillips: --Well, on that issue, just on that one issue as to whether they're might be a state law duty to disclose the issue would be different.

On the issue of whether or not there's any pecuniary gain, and whether pecuniary gain is a necessary requirement of the Mail Fraud Statute, I'd say that's a separate and open issue.

I think we would also have made some additional arguments if this case turned on Mr. Gray's status in terms of when does a duty trigger.

It is one thing to say that public officials have some duties to disclose, but it doesn't seem to me that every, that you know, in this case the government says, Mr. Gray had a duty to disclose basically because he saw some wrong doing going on.

Not that he necessarily benefitted from it.

So, it's not at all clear to me that he would of had a duty to disclose in this case.

But again, we run far afield from anything the jury was asked to decide in this particular case.

Unknown Speaker: Mr. Phillips, I don't think our cases are at common law that it was ever an element of fraud that you had to prove pecuniary gain to the defendant.

Mr. Phillips: This Court's decisions in both Fasulo and Hammerschmidt state that what is involved with respect to fraud is injury and injury defined in terms of property.

Unknown Speaker: Maybe economic injury to the victim, but never a requirement of gain to the perpetrator.

Mr. Phillips: Okay.

Oh no, that's correct.

That's correct.

Unknown Speaker: And that's what you keep arguing--

Mr. Phillips: Well,--

Unknown Speaker: --is missing.

And I just don't see that as an element at all.

Mr. Phillips: --No, Justice O'Connor, I don't mean to imply that.

Throughout our brief we argue that what's missing here is any injury, any economic injury to the victim of a fraud, which is the state of Kentucky, and what is also missing is any pecuniary gain to the defendants.

But that was only in response to Justice Stevens' question.

Unknown Speaker: That just isn't an element.

Yeah.

Mr. Phillips: You know, our position remains that injury to money or property is a condition required for mail fraud.

Unknown Speaker: Well, there's been a lot of cases haven't there in which that has not been required under this Mail Fraud Statute.

You're looking at a number of public officials in other states who have been convicted by the use of this statute.

Mr. Phillips: Well, no decisions--

Unknown Speaker: Without proof of some kind of, much more than an intangible right kind of an argument.

Mr. Phillips: --Well, none of those decisions were by this Court and the government freely concedes that this Court has never decided the validity of the intangible rights theory.

And as we indicate--

Unknown Speaker: But your position is squarely inconsistent with the Kerner case, or Isaacs case rather, isn't it?

Mr. Phillips: --I'm sorry?

Justice Stevens, I'm--

Unknown Speaker: I know it's not been decided by this Court, but the decision Governor Kerner's case, you would require that one, your position is inconsistent with the holding in that case.

Mr. Phillips: --Well, I think the evidence is slightly different in that case because there really was bribery and--

Unknown Speaker: But no injury to the--

Mr. Phillips: --and closeness, the nexus in terms of the duty and the creation of duty--

Unknown Speaker: --I don't think there was any injury, any pecuniary injury to the state of Illinois.

Mr. Phillips: --No, on that issue it's the same.

Unknown Speaker: It's the same.

Mr. Phillips: But,--

Unknown Speaker: But, then where did the duty to disclose come from there?

Cause the status of a public official, wasn't it?

Mr. Phillips: --Well, there was more to Kerner actually than simply a duty to disclose.

There were intangible rights underlying it and that's certainly a part of that case.

There was also, you know, a certain amount of--

Unknown Speaker: In other accounts, but just on the mail fraud is all I'm talking--

Mr. Phillips: --Just on the mail fraud.

But, you know, as we suggested in our reply brief, that wasn't all he was convicted of.

So that even if the Court had taken up the mail fraud issue, would not have required reversal of all the convictions against him.

Unknown Speaker: --I understand.

Mr. Phillips: Which I think--

Unknown Speaker: Well, you say that case is the same as this only insofar as your broader argument is concerned.

That is your attack on the intangible rights theory.

Mr. Phillips: --Right.

Yes, I understood that to be Justice Stevens point.

Unknown Speaker: But, even we reject that argument, you would still say that Kerner was a public official--

Mr. Phillips: Sure, he was clearly a public official.

Nobody disputes that.

And, none of the petitioners are, I mean, Hunt does not.

In sum, the government today asks this Court to sign what is basically a prosecutorial blank check to rid the mails of any political act that a United States attorney finds unacceptable.

What makes this request most dangerous we think, is the fact that even an indictment in the context of political officials or public, or it's going to be party leaders, can be devastating to their public careers.

And thus, the government is asking this Court not only to sign a blank check, but a check that is of enormous consequence.

This Court cannot sign that check.

Only Congress can because only Congress can declare conduct to be illegal.

And Congress has not declared anything that the petitioners have done in this case, as presented to the jury, to be against the law.

Mr. Phillips: Gray's offense, under the instructions to the jury was aiding and abetting Hunt.

Unknown Speaker: And he wasn't charged as a principal?

Mr. Phillips: He was charged in the alternative as a principal.

The instruction is quite clear at footnote A, the District Court's instruction to the jury says, in order to find this scheme, you must find one of the following: Either that Hunt engaged in certain activities and was aided and abetted by the two petitioners, or that Mr. Gray engaged in certain activities and was aided and abetted by petitioner McNally.

It is clearly in the alternative and therefore, the government is obliged to justify both of those theories.

With respect, unless there are further questions on the mail fraud count, with respect to the conspiracy issue and the failure of the Court of Appeals to consider petitioner's contention that the government failed to prove the tax object of the conspiracy, we explained in both our opening brief and our reply brief, why the government's request for a rule of per se harmless error seems to us unwarranted.

In light of the government's concession; however, that if it loses on the mail fraud issue that the conspiracy count must necessarily be reversed.

I would rest on the briefs unless the Court has questions and reserve the balance of my time.

Unknown Speaker: Thank you, Mr. Phillips.

We'll hear now from you Mr. Ayer.

Argument of Donald B. Ayer

Mr. Ayer: Mr. Chief Justice, and may it please the Court:

The government agrees, I think, with one general proposition that is made by the petitioners in this case.

And that's the point that there is a substantial amount of confusion concerning this intangible rights mail fraud theory.

And we would further agree that there is in some opinions of various courts of appeals, what I would describe as extravagant language, talking in terms of standards of moral uprightness, fundamental honesty, fair play and right dealing.

But that's, I think, where our agreement ends because first of all, in terms of this case, which is before this Court, that language I think is completely irrelevant.

Also, as to the very cases in which that language appears, I think one is hard-pressed to find even one where the language itself is necessary to the holding of the case and indeed where the outcome, the decision and indeed the reasoning, if you read the opinion further, isn't well supported on a much sounder and narrower theory of the Mail Fraud Statute.

But before we get to that question of intangible rights, I want to address the first proposition made in our brief, which is the point that this intangible rights theory need not and indeed I think, should not be addressed in order to resolve this case.

Unknown Speaker: Why didn't you tell us that when we were entertaining petition for cert?

Yeah.

Mr. Ayer: If we had known it, we would have told you.

Unknown Speaker: [Laughter]

You mean if you would have thought of it.

Mr. Ayer: Well, yes.

[Laughter]

If we had focused on the jury instructions, at the time that we filed our opposition, which we file I think 700 or so a year, indeed it would have been much better had we done that for all of us, I guess, but we didn't and thus we didn't make the point.

But having discovered it when we discovered it we felt like it was only right to bring it up as soon as we figured it out.

Unknown Speaker: Surely would have been better for us and maybe better for you.

Mr. Ayer: Well, we'll find out I guess.

[Laughter]

The reason why I think that the issue is not presented comes from a simple reading of the instructions, I wouldn't represent that the instructions themselves are simple--

What must be proved beyond a reasonable doubt is that the defendant's knowingly and willfully devised, or intended to devise a scheme to defraud as described in instruction 11.

I don't know why the reference to instruction 11 because the precise language of instruction 11 appears in this instruction 15.

But, in any event, repeated twice is the description of the scheme.

Repeated in instruction 11 and in instruction 15.

If you look at page nine at the beginning of footnote eight back where it first indents, is the reference to the scheme to defraud the citizens of their right to have the business and it's affairs conducted honestly, etcetera.

And then immediately following, the same scheme to obtain directly and indirectly money and other things of value by means of false and fraudulent pretenses, representations and promises and the concealment of facts.

There is no instruction as is typical in situations where you have multiple ways of violating a particular statute.

There is no instruction that says the jury must agree unanimously.

I have at least one of these ways of violating the statute.

Unknown Speaker: But, Mr. Ayer, that instruction does charge that, devised a scheme or artifice to and then it's a conjunctive not a disjunctive that links one or two which suggests that the scheme or artifice embodied both (a)(1) and (2).

Mr. Ayer: That's exactly right, Your Honor.

That's exactly our point is that the jury was told that they had to find a scheme to do both, or they couldn't convict and indeed they did find a scheme to do both.

They found a scheme to obtain property by false pretenses and having done that, and we knowing that they have done that there is no occasion to go further and ask whether the theory and the evidence would support the other theory as well.

Unknown Speaker: xxx.

Mr. Ayer: I think, if both--

Unknown Speaker: I mean, the Court shouldn't have said you had to find both.

Under your theory it would be a scheme to defraud if they just found number two.

Mr. Ayer: --That's correct.

And I must say when I first--

Unknown Speaker: So, the and is really not right.

Take advantage of it, so it's exactly right.

Mr. Ayer: --Exactly right.

Yeah.

We will take advantage of it and I think it is in fact, clearly what the jury was told to do and it's got to be what the jury xxx.

Unknown Speaker: It certainly isn't clearly because the court then goes on to say to find that the defendants, or either of them, devise such a scheme, referring back to the beginning of the preceding paragraph.

A scheme or artifice too.

One and two, which you just quoted.

To find that either of them devise such a scheme you must find beyond a reasonable doubt one of the following, and then it has one or two.

Mr. Ayer: Right.

And the one or two, those are references to the roles played by Hunt and Gray.

In each of those paragraphs, you find discussion of the channeling of commissions.

That is the appropriation, the obtaining of property.

Unknown Speaker: xxx one of those, you proved the scheme described above.

Mr. Ayer: That's correct and that language plus the additional language that says you must find beyond a reasonable doubt that they knowingly devised the scheme above.

xxx.

Unknown Speaker: Well, now, wait a minute.

How do you find any obtaining of property in Number two?

Where is the, or, you know--

Mr. Ayer: Yeah, I do.

It was a matter under the supervisory authority of the Defendant Gray, a secretary of public protection of regulation or secretary of the governor's cabinet at the time that Seton Investment Inc. received commissions from that insurance policy.

And then they talk about the ownership interest that Gray had.

So, there must have been a receiving of commissions by Seton.

Unknown Speaker: --Yes, but you're still left with whatever defect in hears in that number two.

And that,--

Mr. Ayer: Well, I will address that now, Your Honor, as you brought it up.

That the first, that is paragraph one requires in order to convict Mr. Gray that he had aided and abetted Mr. Hunt.

Mr. Gray was at all times relevant either or both the Secretary to the Cabinet, or the Secretary of Public Protection in Regulation.

And in both of those positions, in the second position of protection and regulation, he directly oversaw the entire state insurance program.

And as Secretary to the Cabinet, he was one step and oversaw among others the Secretary of Regulation.

Our theory is that in order to have found one, In order to have convicted under one, and who to have convicted Gray as the jury did, they must have found that Gray aided and abetted Hunt.

And for Gray in his public position to have been essentially turn, at least turning his head to the diversion of this money in ways which in a minute I will show to have been quite improper.

That in itself constitutes the breach of a public duty.

That is his duty as a public official.

Unknown Speaker: --Oh yes, but not under one.

Because under one he's charged as an aider and abetter and for that to be wrong, the principal, namely Hunt, has to be doing something wrong.

I don't think you can rely on Gray's capacity as a public official to satisfy the paragraph one.

Mr. Ayer: Well, we think we can, Your Honor.

And the reason we do is that there is no dispute as to his occupying a public position at all times relevant.

And the public position--

Unknown Speaker: But that's not because an aider/abetter is it?

I man, as an aider and abetter, he has to be aiding Hunt to do what is charged in that paragraph.

Mr. Ayer: --Well, the fact that most have been found is that Gray aided and abetted the scheme that Hunt was carrying out.

Unknown Speaker: Right.

If it said aided or abetted, in his official capacity, yes.

But it doesn't, it just says aided or abetted.

He could have aided and abetted him as a private citizen.

Mr. Ayer: I think what might be helpful in answering this question in a slightly, maybe circuitous way, but nonetheless it may be useful to refer to the facts in the case and in order to that in a brief way, I have submitted through the clerk, copies of exhibits that were used at trial.

And what they do, I'm not going to go through them line by line, but they were indeed used in trial to demonstrate the evidence in the case in a fairly brief and concise way.

Exhibits one and two are essentially flow charts of the way the money flowed from the Commonwealth of Kentucky to, in premium payments, to two different insurance companies and then the Commission's coming back from the carriers to the Wombwell Agency.

The Wombwell agency being the broker who got the business and agreed to handle this Workman's Compensation business for $50,000 a year and then at Hunt's request agreed, take that $50,000 and I, Hunt, as head of the Democratic Party will tell you where to send the rest of the commissions that you get back.

The key part of these diagrams.

Number one covers the period of 1976, I guess '76 through the middle of '77 and then other one covers the period '77 through '79.

Is what happens with the money, the premium, I'm sorry the commission payments once hey come back to the Wombwell Agency and what these, the little boxes over on the right hand side show, are the channeling of the checks to two different places.

One is to Seton Investments.

Now Seton Investments as we've indicated in our brief is an entity which was created by Hunt and Gray.

It was set up as a real estate investment company, but in fact, transacted no real estate business except the purchase of two condominiums, which the evidence showed was for the personal use of Gray and Hunt.

It purported to be for purposes of this scheme because it had to be under state law an insurance brokerage entity.

In fact, it transacted and the evidence showed it transacted no insurance business whatsoever.

It did not have an insurance license.

It put on forms which were submitted to the Wombwell agency as proof.

Unknown Speaker: xxx receiving commissions.

Mr. Ayer: That was the business it was in, Justice White.

And that is illegal under state law.

It is illegal under the provision of state law, under Kentucky revised statute 34.9-100, which we've cited in our brief, says that it is not a proper purpose of an insurance license to have it for the purpose and solely for the purpose of enabling the licensee to receive rebates or premiums.

Unknown Speaker: Do you think they foresaw this situation?

[Laughter]

Mr. Ayer: Well, they probably foresaw situations like it, given the existence of this kind of a patronage system in Kentucky, and given the acceptability under another provision, of splitting of commissions.

They wanted to make clear that this kind of situation is not acceptable.

Unknown Speaker: Still waiting to see who's been done out of money, you know?

Mr. Ayer: Well, who has been done out of money, number one, we would dispute and there is evidence I think in the record that supports the dispute that there was simply no way for Kentucky to do anything other than pay the money that it paid and to have the premiums that were paid, I'm sorry, the commissions that were paid back to Wombwell paid in a certain amount.

It is true that there's a regional commission that is set up.

I think it's basically part of the insurance industry that studies and decides what a reasonable commission is on a certain kind of policy.

It is always possible to renegotiate something like that and indeed there is testimony in the record that there, that that is a possibility.

It was never done here--

Unknown Speaker: That certainly isn't a crime to fail to get the lowest possible price you can for the state in dealing with insurance people, or auto people, or anything else.

Mr. Ayer: --That's absolutely correct, Your Honor.

Unknown Speaker: xxx making this argument to show that the state of Kentucky lost some money?

Mr. Ayer: No, I am not.

I'm trying to answer Justice Scalia's question as to who was done out of money.

It is indeed the case that had people been public watchdogs, looking for where the money's going, it would have come out differently.

That's not the point.

That's not the reason why this is illegal.

This is illegal, what I'd like to do is--

Unknown Speaker: Here is the analogy that I'm, patronage systems were never considered illegal.

I mean, that's why we had to have a law to have the civil service.

And the theory was, somebody has to have the job, you're going to give the job to somebody, why not give it to our guys?

That was never thought unlawful, or it certainly wasn't considered fraud.

Now it seems to me, you would have to persuade me that this is something any different from that to convince me that it's fraud.

And so far, you haven't.

I don't see how anybody has been done out of any money.

Just, the money has to go to somebody.

It might as well go to our guys.

Mr. Ayer: --Okay.

Unknown Speaker: Is that fraud?

You aren't arguing the state was done out of anything?

Mr. Ayer: No.

We are not and we did not at trial.

Unknown Speaker: But I take it you are arguing that simply receiving premium payments in the mail is different from getting paid for a job that you perform.

Mr. Ayer: Well, It's different.

I am not sure how much we can make of that given the premise that we all start from that this patronage scheme is legal and therefore, it's perfectly legal for someone out dole out money to his friends.

Unknown Speaker: I thought you were arguing that it wasn't necessary at all for Kentucky to be cheated out of any money.

Mr. Ayer: That's correct.

Unknown Speaker: It's just that somebody was receiving money under false pretenses and--

Mr. Ayer: That's correct.

Unknown Speaker: --by concealment and things like that, which is mail fraud.

Mr. Ayer: That's correct.

What has been done here, what I'd like to do is start with the proposition that, hypothetically speaking, let's forget that these people are in fact, public officials.

Let's leave that out of it.

As I think we have demonstrated in our brief, what was done was a, what was shown was a complete scheme for obtaining property by false pretenses.

The false pretenses are the setting up a phony insurance brokerage outfit for the purpose of making it appear acceptable to channel this commission money to them.

Under state law it is illegal to split commissions with anyone other than an insurance broker or agency.

And so what they did was to create this entity as an independent company, disassociate themselves, that is Gray and Hunt, from it by bringing in at least at a late date, McNally, to serve as its president and act like this is an independent entity that McNally is in charge of.

And indeed at trial the argument was that McNally owns this.

This is all his, we don't own it, that is Gray and Hunt don't own it, McNally owns it.

That scheme, just leaving out the element of public official and public obligation is in and of itself, that deception to allow the channeling of money to Seton, which indeed then goes essentially to the use, as is indicated on our exhibit three, to the use of these individuals in the form of condominiums.

That is itself a complete mail fraud scheme.

A scheme for obtaining property by false pretenses and we believe that that is the first and easiest way to resolve the case.

Unknown Speaker: Doesn't the false pretense have to be a pretense to get the property?

That but for that pretense, the property would not have been given?

Mr. Ayer: Well--

Unknown Speaker: You don't say I defraud somebody if I go up and say, I'll buy your car for $500 and I give him my wrong name.

You wouldn't say that I defrauded him of the car so long as I give him the $500.

Mr. Ayer: --It wouldn't have been possible for, even if they weren't public officials, it wouldn't have been possible for either Gray or Hunt to walk up and say give me commissions.

Even if they were politically influential because they are not insurance brokers.

And they do not have the requisite license to make it legal under state law to participate in this particular form of patronage.

Unknown Speaker: So whoever would have gotten the insurance commissions were done out of them?

I mean, because these two people got them and they weren't entitled to them, whoever was paying it to them would have kept them.

Mr. Ayer: I think, well the whole idea was to take this pot full of money which amounted $850,000 over four years and spread it around.

Unknown Speaker: Someone else would have kept the money.

Someone else would have got the money xxx.

Mr. Ayer: Someone else would have gotten it, but I don't think it would have been somebody who could of claimed he had a right to it.

Unknown Speaker: Who would the somebody else be?

Mr. Ayer: Someone else would in all likelihood of been, some other insurance brokerage, I should say some insurance brokerage outfit in the state of Kentucky who had been supportive of the governor and the administration.

Unknown Speaker: And so that's the person who is economically injured?

It's very clear as to this first cut, leaving out the public official and the public intangible right element.

It's very clear that what was proven on this first level was a scheme to obtain property by false pretenses.

The false pretenses being the creation of this Seton outfit which is phony.

Never does any business and just is there to receive money and channel it to Gray and Hunt.

That, in and of itself, the obtaining of that property, forgetting about who is hurt, there is no requirement in the law that someone be harmed as a result--

Unknown Speaker: Well, you said, Justice O'Connor made the point a while ago that fraud doesn't ordinarily require that the defendant may have gained, but I had thought at least fraud required that there had been some economic injury to someone.

Mr. Ayer: --Well, the--

Unknown Speaker: You say, not only need their be no gain, but there not need be any harm.

Mr. Ayer: --I think that's correct, Your Honor.

And I think that is emphatically clear--

Unknown Speaker: Why is it prohibited?

[Laughter]

Mr. Ayer: --Well, I think it's emphatically clear on the face of the statute that that is true.

Because the statute has three different clauses.

The first one is for creating, or putting into effect a scheme to defraud, or for obtaining money or property by false pretenses.

That is exactly what was done here, was the obtaining of money or--

Unknown Speaker: xxx right it.

It really does you're telling, cover the case where I go up and buy a car for $500, give my wrong name.

Mr. Ayer: --No, I don't think so, because I think you're giving your wrong name is no part of inducing the obtaining of money or property.

He wasn't relying on the fact that you gave a wrong name.

Whereas here, they very much are relying on the fact that Seton is supposed to be, and indeed to illustrate that, the Wombwell Agency, Mr. Tabeling specifically asked more than once for assurance that Seton was in fact, a legitimate insurance agency.

And so what he was given--

Unknown Speaker: Right.

Mr. Ayer: --was the insurance license number of--

Unknown Speaker: I have to add a fact then.

Mr. Ayer: --Okay.

Unknown Speaker: This automobile dealer does not sell cars to government employees.

And I walk up and I say, you know, my name Jones and I am not a government employee.

He sells me a car for $500.

I have defrauded him.

Mr. Ayer: Well, I think that as a technical matter you may well have.

If it is material and if you have a duty not to lie to him, which I think is fair to say you do.

Unknown Speaker: If that were the only permissible interpretation of a federal criminal statute, I would think a court would be fairly loathe to reach that.

Mr. Ayer: Well, what we would suggest as a description of what must be shown, as a set of requirements under this intangible, first of all, let me say, I think it makes very little sense to conclude that somehow the mail fraud statute doesn't cover schemes to defraud of intangible rights.

If you define an intangible right as any right other than the physical possession of something.

You talk about a right to a stream of income under a contract.

Or, you talk about a right to purchase a piece of property.

You talk about almost any right in our society.

Very few people walk around with gold bars in their pocket.

Most people rely on intangible rights.

And so, as an opening proposition, we've got to be all assuming that the Mail Fraud Statute can reach some--

Unknown Speaker: xxx intangible property.

Mr. Ayer: --Intangible property.

Unknown Speaker: That's a good old concept, intangible property.

It's a little different from intangible rights in that it doesn't include the right to good government, for example.

Mr. Ayer: Well, I'm not sure I know where it begins and ends.

If I have expectations that have value, is that intangible property?

Unknown Speaker: xxx same category.

As traditional a category as rights in stock and so forth which are intangibles.

Mr. Ayer: Do I think what is?

Unknown Speaker: The right to good government is--

Mr. Ayer: Well, I think--

Unknown Speaker: --an intangible right of which one can be defrauded.

Mr. Ayer: --I think in the following, when you meet the following set of requirements the answer would be yes.

And this is what we would be suggesting as a substitute for what I referred to earlier as the extravagant language of some opinions.

Number one, that there must be the duty that you're talking about has got to be an enforceable duty of some kind.

The thing you're being defrauded out of is not just a moral aspiration.

It's got to be a real duty.

It can arise from the criminal law.

It can arise from the civil law.

It can rise from a statute, or the common law.

And we would suggest it can arise from contract.

Unknown Speaker: You don't even need standing to be able to enforce that, do you.

Mr. Ayer: No, xxx.

Unknown Speaker: I assume I have no right to sue for good government, right?

It's a right I have, but it's not a right I'm able to sue for.

Mr. Ayer: Well, I think that's correct.

I think the state in dealing with--

Unknown Speaker: But I can sue somebody for defrauding me of it?

Mr. Ayer: --Well, I think the state can sue, or can bring a criminal action for defrauding it of the right to honest services of its employees.

Or the honest services of people who have been given trusted, trusted with responsibilities.

But, that's only the first part.

That's the first step.

The second step is that there must be a causal relationship between the breach of that duty and either the appropriation or the deprivation of a thing of value.

We are not suggesting that simply the abstract non-performance of a duty is a sufficient basis to bring a criminal action.

We think that it is quite appropriate to require that the breach of the duty have some kind of a consequence and in this case the consequence, well let me skip over this case for a minute.

The third element would be an element of deception.

Which is a traditional element of the Mail Fraud Statute.

That there must be some effort to cover up the scheme to deceive, to essentially hide what's going on.

And when you put those three things together, I would submit what you have is really only another way of saying what is going on in a more traditional property oriented male fraud case.

Unknown Speaker: Do you think these instructions covered those elements insofar as this theory of deprivation is concerned.

I don't see anything in the instructions that suggest that these people had any duty to, unless you say that the Court must of thought there was a duty or they wouldn't have given this kind of an instruction about disclosure.

Mr. Ayer: We, just to repeat briefly, we think first that the case should be resolved as one for obtaining property xxx pretenses.

Unknown Speaker: Yes, I understand that.

I understand.

Mr. Ayer: Leaving that aside I think the instructions in their references to the directing of commissions and to the--

Unknown Speaker: Without disclosing?

Mr. Ayer: --Right.

And to the positions, there's two different things we have to talk about.

One is the position of Gray and whether is position and the duties that he owed were sufficient.

And we think that that can be a basis for deciding the case under either xxx.

Unknown Speaker: Wouldn't that be a jury question, whether they had the duty, or not?

Or was that legal, some instruction the court ought to give?

Mr. Ayer: Well, I think that--

Unknown Speaker: Because I don't see anything about a duty to disclose.

As far as these instructions are concerned, it wouldn't make any difference whether there was a duty to disclose, or not.

Mr. Ayer: --What, the discussion--

Unknown Speaker: There was a failure to disclose.

Mr. Ayer: --The discussion that does exist is the discussion of Gray's position as Secretary and the positions that he held.

Unknown Speaker: Yes.

Yes, but it doesn't say that he had a duty, or it doesn't ask the jury to find it.

If he didn't disclose it that was all the jury was interested in.

Mr. Ayer: Well, I think there's two different things going on here.

One is the duty to disclose.

And we would not put primary emphasis on that.

What I would suggest is that starting with the premise that there was an obtaining of property by false pretenses, how was it done?

It was done by these two individuals setting up the scheme and it happens that Hunt was imbued with official power, that is, the governor told him that he had the power to pick the insurance companies and to direct the commissions.

And secondly, Gray was in a position overseeing all of this and a lot of other activity.

What had to happen was the, by Hunt, the misuse of his position and of his authority.

He had to misuse state governmental power to direct this money to himself.

That's the first thing that had to happen.

And, Gray had to, in his position, essentially at a minimum, look the other way and happily receive the money at the other end.

And we think the use of state governmental power essentially to commit a federal mail fraud and that's going back to the first step.

That is apart from their state governmental authority, they committed a mail fraud.

The use of power to do that is a separate abuse of authority, that is, an abuse of the governmental authority.

Unknown Speaker: xxx did say that the failure to disclose, if there was a failure to disclose it had to influence, if there had been a disclosure, the conduct of other government officials would have been different.

Mr. Ayer: I don't know if that's in here, Your Honor.

I--

Unknown Speaker: Well, if there had been a--

--xxx and if Gray had an ownership interest, that he failed to disclose that interest to persons in state government whose actions or deliberations could have been affected by such action.

Mr. Ayer: --Okay.

Unknown Speaker: A jury xxx find that.

And so non-disclosure with that kind of a consequence.

Mr. Ayer, before you get through, you've given us the three parts of your theory and the first of which is the duty that's enforceable.

What, at least with regard to Hunt, what is the duty you're talking about?

Mr. Ayer: With regard to Hunt?

Unknown Speaker: Yeah.

Mr. Ayer: I think with regard to Hunt, if you have to reach that, and we submit you don't,--

Unknown Speaker: That's mainly what the Court of Appeals relied on as I remember their opinion.

Mr. Ayer: --Well, that's right.

But, it's usual I think, not to decide cases where they are not going to affect the outcome.

But the duties--

Unknown Speaker: xxx you said there's sufficient evidence as to the Hunt charge, but they didn't really reach the other, so we'd have to send it back to find out.

Mr. Ayer: --Right.

The duty was a duty not to misuse the governmental authority which was given to him to commit what is apart from his duties as a governmental official, a criminal act.

That is the scheme for obtaining property by false pretenses.

Unknown Speaker: What is the criminal act, you mean as a matter of federal law?

Mr. Ayer: Yes.

He--

Unknown Speaker: Well, this kind of xxx.

Mr. Ayer: --That the whole, as I indicated before, the whole scheme--

Unknown Speaker: The duty is a duty not to violate the Mail Fraud Statute.

Mr. Ayer: --That's right.

That he as a--

Unknown Speaker: If you prove a violation of the Mail Fraud Statute by proving you violated the xxx.

Mr. Ayer: --Well--

Unknown Speaker: I have difficulty following that.

Mr. Ayer: --Okay.

Well, what we tried to show is that the initial, the scheme to obtain property by using Seton, a phony shell company as a recipient for money.

Unknown Speaker: Of course, the jury was not required to find they were phony companies, as I read the instructions.

They were required that they had a secret interest in it, but they could have had a secret interest in a legitimate brokerage firm.

Mr. Ayer: Well, they were required to find a scheme for obtaining property by false pretenses.

Unknown Speaker: All right.

Mr. Ayer: There's got to be some false pretenses.

If there's no false pretenses then xxx--

Unknown Speaker: The false pretenses are not disclosing the ownership interest.

That's what the instruction says.

Mr. Ayer: --Well they certainly could also be the, and the bulk of the evidence in the case certainly dealt with the channeling of money to Seton.

Unknown Speaker: Right.

Mr. Ayer: That's what the case was about.

That's what the time in court was spent on was showing this money, check after check after check going to Seton.

Unknown Speaker: I understand, but you argued at some length the fact that Seton was a sort of a shell.

Mr. Ayer: Right.

Unknown Speaker: But the jury wasn't instructed to find that.

Mr. Ayer: I don't believe that there's anything in the jury instructions that says the jury had to find specifically that Seton was a shell.

They had to find a scheme to defraud by obtaining property.

Unknown Speaker: So, then don't we have to assume the case would be the same for legal purposes even if Seton were not a shell?

Cause we don't know the jury thought it was.

But there still, you're not necessarily out of, totally lost because you still then would claim the failure to disclose the ownership interest, I guess, is enough.

Maybe you don't want to go that far.

But then we're back to my just giving the wrong name.

And not even saying that I'm not a government employee.

Mr. Ayer: Well, I think what is critical is that there be a linkage between the duty that's breached, which we are arguing is--

Unknown Speaker: But you're not saying that's the duty to disclose.

That's what I'm trying to find out for--

Mr. Ayer: --Well, I--

Unknown Speaker: --The duty to this breach is the duty not to violate the Mail Fraud Statute.

Mr. Ayer: --I think there is a duty to disclose.

The only reason I am hesitant to rely primarily on that is that I frankly think the basic scheme to defraud, that is to get the money, by using Seton is a more persuasive fraud.

There is indeed a duty, on the part of a public official to disclose and I think, I would argue if we had say it to get, you know, to resolve the case which I think we don't for at least two other reasons.

That there's a duty on the part of Hunt to disclose based on his use of governmental authority.

I see my time is expired.

Thank you.

Unknown Speaker: Thank you, Mr. Ayer.

Mr. Phillips, you have eight minutes remaining.

Rebuttal of Carter G. Phillips

Mr. Phillips: Thank you Mr. Chief Justice.

I would like to make simply three points.

I hate to drag you back into the jury instructions, but I think they're fairly important in this context.

The first statement that Mr. Ayer made with respect to the instruction, I think, requires some clarification was his suggestion that Mr. Gray and his aiding and abetting must have been a public official, that the jury must have found that.

Aside from the point that I believe Justice Stevens made, which is that there was no requirement in the jury instruction that that be found.

The truth is that at the closing argument, the United States attorneys, the Assistant U.S. Attorney told the jury that the aiding and abetting was in setting up Seton.

And it is undisputed that when Seton was set up by Mr. Gray he was not a public official.

So, it's both contrary to the instruction and contrary to the facts of the case.

Second, with the respect to the false pretenses, I guess I would just like to repeat what Justice Stevens said, this whole notion of a phony business and the various ways that that may have operated is an interesting theory.

It is not the theory that was presented to the jury in this case and I take that as the best evidence that the reference to false pretenses was not regarded as somehow a separate item in this case at all, either to the court, or to the jury.

And the court made it quite clear what it thought the appropriate theory for conviction was in this case.

And that set out in the portion that describes the scheme underwritten in the indictment.

And finally, with respect to the government's eleventh hour effort to find some limiting principles for its mail fraud, I took it as quite interesting that in describing that there must first be a duty, Mr. Ayer suggests that he wouldn't put primary emphasis on that point and it's quite clear to me why he wouldn't do that in this case because wherever you look there is simply no duty.

And I think ultimately what it came down to was that the duty that exists in this case is a federal duty.

But that's not what the Mail Fraud Statute requires.

This Court made quite clear in Parr that you look to other sources to determine what is fraud, and the fraud in this case is based on a duty.

You must look to those sources to find out where that duty exists.

There are none accordingly and the petitioner's conviction should be reversed.

Chief Justice Rehnquist: Thank you, Mr. Phillips.

The case is submitted.

Unknown Speaker: The Honorable Court is now adjourned until Monday next at 10:00.